Exchange traded funds are becoming a legitimate thorn in the side of hedge funds. First, there is the issue of size.
“At the end of Q3 2013 Eurekahedge reported that there was $1.91 trillion invested in 8,500 hedge funds which they state was just 2% below their historic peak, BarclayHedge reported that there was $2.0 trillion invested in 4,922 hedge funds and HFR another firm which creates research and offers a database on the global hedge fund industry reported a new record level of $2.5 trillion in assets in 8,201 hedge funds,” according to Deborah Fuhr of ETFGI. [ETFGI: ETFs Almost Bigger Than Hedge Funds]
ETFGI notes global exchange traded products had $2.22 trillion in combined AUM at the end of last year, so depending on which hedge fund AUM reading one decides to value, ETFs are either already larger than or close being bigger than hedge funds when it comes to assets.
Then there is the issue of performance. A scant number of hedge funds, 16 to be precise, outpaced the S&P 500 last year. A portfolio comprised of the 100 largest, not all of which did well last year, outpaced a major hedge fund index in 2013. ETF data provider ETFreplay notes “investors in the top 100 exchange-traded products made +$136 billion in 2013. Actually, they made more than that if you count inflows — but we calculate the ETFreplay 100 by locking in starting assets as this captures the big themes quite well.”
“The $136 billion in profits equates to a +12.7% total return for the year,” according to ETFreplay. A gain of less than 13% in 2013 does not sound like much compared to the 32.3% gained by the SPDR S&P 500 (NYSEArca: SPY). Then again, the 12.7% added by the ETFreplay 100 is 600 basis points better than what the HFRC Global Hedge Fund Index delivered.
The 20 largest contributors to the ETF Top 100 Multi-Asset Index’s gains last year, in addition to SPY, included the iShares MSCI EAFE ETF (NYSEArca: EFA), PowerShares QQQ (NasdaqGS: QQQ), Vanguard Dividend Appreciation Index Fund (NYSEArca: VIG) and the Health Care Select Sector SPDR (NYSEArca: XLV). [Two Sector ETFs to buy in January]